No one-size-fits-all policy for the crisis

By Harry van Versendaal

When Latvia was hit by a financial crisis in 2008, the government had few qualms about embracing cost-cutting measures and structural reforms, while keeping its national currency pegged to the euro.

Now in the waiting room for eurozone membership, due in January 2014, this Baltic nation’s decision makers appear undeterred by a rather skeptical public and the woes dogging other eurozone countries, most prominently Greece.

In an interview with Kathimerini English Edition during his visit to Athens this week, Latvian Foreign Minister Edgars Rinkevics said he sees his country’s euro entry as a further step into the West by the former Soviet republic after it joined the European Union in 2004.

Notwithstanding Latvia’s portrayal by several Western policymakers as a poster child for austerity that could serve as a roadmap for other troubled economies, Rinkevics is reluctant to draw parallels with Greece, stressing instead the economic and cultural particularities of each country.

The eurozone is in crisis but Latvia still plans to join in January 2014. Haven’t you been deterred by the difficulties faced by countries using the single currency?

I really do not believe that the problems are caused by the single currency. We have seen – and also our own experience between 2008 and 2011 has shown – that the currency has had no direct effect on the crisis. It’s about the economic and financial policies of the country in question. Keeping this in mind, we see eurozone membership as an opportunity to boost trade relations with other countries in the euro area. Membership however is also a geopolitical choice. By signing the accession treaties here in Greece 10 years ago, we joined a political and economic union. But we still have to integrate more in terms of the financial system, transportation and energy. In a way, it completes the move away from the former Soviet Union to a more European union.

Is the close presence of Russia also a geopolitical incentive?

It’s more about the economic and financial security of the country. It’s more about deeper integration in the EU. Given that, I would not say that joining the eurozone is specifically against somebody. It’s about boosting our own standing when it comes to politics and the economy.

Polls show that only one in three Latvians wants to join the euro. Why is the figure so low and is this enough support to give the government’s decision legitimacy?

First, our public reads what is happening in the eurozone. Two or three years ago, newspapers, Internet media, TV and radio were full of doomsday scenarios that the euro is going to crash and that the eurozone is finishing, which is not what we see now. We actually see that the eurozone is well and alive. Secondly, it’s also an emotional issue. Our currency, the lat, was reintroduced after Latvia gained independence back in 1993, and for 20 years the currency has been very stable. We had a very strong monetary policy by the Bank of Latvia; we did not devalue even when probably it could have been a possible course of action back in 2008 and 2009. So there is a very strong emotional attachment to the currency and even if people understand that there can be gains, they still find it hard to say good bye.

How to tackle this [public skepticism]? I think the only way is for the people to see that nothing bad happens. Money is money, what you call it does not really say much. It is going to take about six months to a year for people to see the effects and to understand that actually nothing bad happens.

How will the Latvian people react if the country has to contribute to eurozone crisis funding after it joins?

That’s something that certainly people really don’t want to do. But this is about solidarity and we also remind ourselves that it was the IMF and the EU that actually saved our country back in 2009 by providing loans. Solidarity works both ways.

Are you worried about growing Euroskepticism in Europe?

Yes, although as far as Latvia is concerned, the recent Eurobarometer poll showed an interesting picture. Ten years after joining the EU, 57 percent of the general population believe that membership has benefited more than caused problems, against an average EU rate of 54 percent.

Decision making

Within a European Union where the power to make decisions appears to be increasingly concentrated in the hands of a small group of member states, what role is there for smaller countries like Greece and Latvia to play?

I think that with things being delegated to Brussels – particularly economic and financial issues such as banking union and more regulation of financial institutions – we still have an opportunity to use instruments like the Council, where we can work with like-minded countries to change or influence decisions that are not really in our interest. We had a very good experience when discussing the so-called Friends of Cohesion group, where Athens and Riga worked together to make sure that countries that receive European funds – including Greece and Latvia – prevent drastic cuts to the European budget.

There are some areas, like EU foreign policy, where I would like to see a more unified approach. We have a lot of success stories, like the EU standing on Syria, the EU standing on Iran. But then you have the Middle East peace process, where you have three different groups. Similarly, the EU policy on Russia has not always been unified.

Do you see any areas where it would be possible for Greece and Latvia to help each other?

Certainly. As we join the eurozone we are interested in working more closely with Greece on reform and development of eurozone policies, banking and financial regulations. Secondly, I think we have common interests and will work together because our presidency is in the first half of 2015, and then there is the Eastern Partnership initiative. I also expect that your presidency is going to address EU institutional issues – there can be a discussion about some changes in the institutional framework and this is something that small countries are particularly sensitive about.

As far as NATO is concerned, we are both members of this alliance and we have already worked quite closely also on issues that are related to, for instance, Article 5 operations and exercises [Article 5 requires NATO member states to come to the aid of any member state that comes under armed attack]. Greece is currently participating in a NATO exercise in the Baltic area. Also, we understand your concerns about immigration policy, so there are plenty of issues of common interest. And, of course, economic cooperation, which is probably not reaching the highest level and there is room to expand, and tourism.

Crisis response

What would you say were the main reasons for Latvia overcoming its crisis? What kind of austerity measures were involved?

It seems to me that each country has to tackle the crisis in its own way, taking into account its own history, traditions, structure of society, economy and so on. But we basically did three things. One was to introduce very severe cuts to public spending. These had been implemented by the end of 2008, and by the end of the crisis we had cut our public sector on average by 25-30 percent. All ministries suffered very severe cuts, the Ministry of Foreign Affairs lost about 30 percent of its employees. The remaining staff had their salaries slashed by about an average 30 percent. Operational budgets were also cut. Second, we did our best to keep programs that were co-financed by the EU. That was almost the only stimulus package for our economic growth. And third, while we were cutting our public expenditure, some taxes were raised, such as personal income tax and VAT.

Now, in the third year of economic growth, we are actually going back to reducing some taxes. People need to feel the crisis is over. Yes, on a macroeconomic level everyone considers we are out of the woods, but on a personal level, it is only now that people are probably starting to feel a modest increase in their salaries.

You say every country has to deal with the crisis in its own way. Does Latvia then not vindicate the tough approach taken in bailing out countries like Greece and Portugal?

Latvia, as well as Estonia and Lithuania are sometimes mentioned as good examples of how you do things. At the same time, we live in the north and that makes a difference. The root causes of our economic and financial crisis were different from those here in the south. We had an enormous real estate problem. After joining the EU, salaries skyrocketed in many areas. And, of course, they then went down like a stone. Public perception of what happened and who was responsible was also different. The new government that came in in 2009 was able to convince people that things had gone wrong because of bad polices introduced by a couple of governments before, and people actually acknowledged this. Our prime minister is in his fifth year in power, which is kind of a record for our country, where we tend to change governments and prime ministers quite often – even in good times. There was a general understanding among the public regarding the austerity policy. It was bad, but it was the right thing to do.

Did the Protestant culture in your country play a part in helping your country adjust? Did the fact that your country had been occupied for so many years also have an impact on how people accepted the measures?

It certainly worked, I think you are right. It was part of the solution. But, let’s face it, another part – which is now also an issue in Greece as far as I know – was that a lot of people left for jobs and opportunities in the UK, Ireland and other countries.

Government critics have said that high emigration was used to mask Latvia’s unemployment problem.

It helped mitigate the social effects. However, if you look at figures from the good years following EU accession in 2004, emigration was already in full swing as people were now free to move abroad for studies or work. Interestingly, we are starting to see that some of these people are starting to return as they are being offered competitive jobs [in Latvia].

What are the other major problems caused by the cuts you pursued?

Certainly one issue is the quality of public services after a lot of people left the government. Some cuts have been too severe and we need to rebalance. Another is how to get our demographic problems solved as birthrates dropped during the crisis years, in fact, for the second time – the first was in the early 1990s when the Soviet Union collapsed and we had to change our whole economic and social system. Demography is a problem for most EU countries and is closely connected to the issue of social security reform. We had to raise the retirement age from 62 to 65 and to severely cut social security programs including unemployment benefits.

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